"The Market" by Sheldon M.
Bell
Volume 2 - Issue 1 - March 31, 1998
Every year in January the "January Effect" groupies come out to play. They adhere to the mantra that January sets the stage for the stock market for the year. The problem with these theorists as well as other pundits is that their rational is just not true. They fill the media with their statistics about what is to come for the stock market, and site the statistics of the past as the underpinnings of their predictions of the future direction of the stock market.
They carefully screen out the data from the past that conflicts with their predictions. The simple truth is that no one can predict with certainty the direction of the stock or bond markets no matter how they extrapolate the data available at any point in time. The old cliché "hindsight is always 100%" should be the mantra of investors who are sensible and rational.
January 1998 started out on a sour note. Investors worried about the potential negative affect of the Asian crisis on the U.S. economy. Remember the "Sell-Off" of October 27, 1997? It was triggered as investors globally decided to sell off their stocks and bonds in the developing "Asian Tigers" as their currencies plummeted. The Dow Jones Industrial Average (DJIA) fell over 500 points or 7.2% that day. Investors however shrugged off their fears of the "Asian Flu" by the end of 1997 and bid up stocks about 9.7% from the bottom hit on October 27, 1997. I guess the Federal Reserve’s decision to leave interest rates unchanged on December 14, 1997 fueled this short term rally.
In February the bulls took over again. Bidding up stocks to valuation levels that have set historic benchmarks with price earnings per share at historic highs and dividend yields at historic lows.
The DJIA closed the first quarter of 1998 at 7908.25.
The bull market is now over seven years old. Perhaps investors should assume making money in the stock markets is a no-brainer as the DJIA has risen from 2658 in 1991 to it’s lofty level today without one major protracted decline. Investor’s have gobbled up stocks after each sell-off , and so far have reaped the rewards of these "astute buying opportunities".
Perhaps the fear of the Asian financial crisis was misplaced in October of 1997. Perhaps the greed and carelessness of most investors in the last three years will be rewarded with returns of 30% per year forever.
Perhaps all of this is not true, and investors who work hard at selecting appropriate financial assets will be the ones to prevail.
The investors who have the right mix of stocks, bonds and cash to best accommodate their financial situation. The investors with a truly diversified portfolio , who rebalance their portfolios’ periodically. The investors who don’t listen to their friends, relatives, or stockbroker about the next stock that can’t miss.
With all this said now let us discuss the global economic environment that exists today to better understand the macro-economics that rule the financial markets over the long term. First let’s look at the Asian economies.
The Japanese economy the second largest in the world is still in the doldrums, continuing with slow or negative growth. Its stock market is still in shambles after nearly a decade, declining almost 50%. The Japanese economy however, has a low correlation to the U.S. and as such, unless the Japanese sell off our Treasury Bonds to raise cash the U.S. will not feel to much pain if their economy continues to languish. If anything, we should learn from Japan that an economy can be large and basically sound and still it’s stock market can remain in a protracted bear market, something the U.S. stock market has not seen since the early 1970s.
The developing economies in Asia including South Korea, Indonesia, and the Philippines, will continue to have troubled economies for a long time to come. They are in great need of capital to repay loans for their overbuilt infrastructure and factories. This capital will be provided at a high cost to their respective economies. Since the U.S. exports heavily to these nations and import their goods in great quantity, the U.S. may see some damage done to the profits of the huge U.S. multi-national corporations that export to this region and that compete with the imports from these and other Asian economies. Reports recently are showing a slowdown in corporate profits from the big U.S. multi-nationals in the 4th quarter of 1997 that are directly attributed to the Asian situation.
In Europe the developed countries are enjoying a "mega bull market" in 1998, with some of the countries up 20%-40% year to date. This hysteria is as a result of the projected benefits to the European economies when the "Euro" supposedly becomes the common currency of most European countries in 1999.
If there is any problems that are caused by one central bank governing all these diverse nations their respective stock markets may see severe corrections before long.
The U.S. economy continues to roll along with historically low unemployment, low interest rates, high productivity and corporate profits. However, in the 4th quarter of 1997 corporate profits slipped 2.3% from the previous quarter, the first drop in more than one year and the largest since the first three months of 1994. This may be just the tip of the iceberg of things to come. The full extent of the Asian crisis may not have played out in the U.S. yet. Intel, Motorola, and Compaq have already released early warnings due to Asia for their first quarter earnings reports.
I will continue to add convertible bonds, preferred stocks, utility stocks, government and corporate bonds to my clients’ portfolios while reducing their exposure to the stocks of the large multi-national U.S. corporations.
If inflation remains tame, bonds should continue to fare well and add income and stability to an investment portfolio.